Sticky Information Diffusion and the Inertial Behavior of Durable Consumption

38 Pages Posted: 8 Mar 2013

See all articles by Yulei Luo

Yulei Luo

University of Hong Kong

Jun Nie

Federal Reserve Bank of Kansas City

Eric R. Young

University of Virginia

Date Written: March 4, 2013

Abstract

This paper studies the aggregate dynamics of durable and nondurable consumption under sticky information diffusion (SID) due to noisy observations and slow learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of income, durable, and nondurable consumption at the aggregate level. Specifically, we find that SID can help generate (i) realistic smoothness in durables and nondurable consumption, (ii) the autocorrelation of durable consumption, and (iii) the contemporaneous correlation between durable and nondurable consumption. Furthermore, we show that incorporating a fixed cost into our SID model does a better job of reproducing the infrequent adjustments of durables consumption at the individual level and the slow adjustments at the aggregate level.

Keywords: Durability, Slow Learning, Sticky Information Diffusion, Infrequent Adjustments

JEL Classification: C61, D81, E21

Suggested Citation

Luo, Yulei and Nie, Jun and Young, Eric R., Sticky Information Diffusion and the Inertial Behavior of Durable Consumption (March 4, 2013). Federal Reserve Bank of Kansas City Working Paper No. RWP 12-11. Available at SSRN: https://ssrn.com/abstract=2230051 or http://dx.doi.org/10.2139/ssrn.2230051

Yulei Luo

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

Jun Nie (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Drive
Kansas City, MO 64198
United States
(816) 881-2255 (Phone)
(816) 881-2199 (Fax)

HOME PAGE: http://homepages.nyu.edu/~jn461/research.htm

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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